FHA Versus Conventional Mortgage After Bankruptcy
This BLOG On FHA Versus Conventional Mortgage After Bankruptcy Was UPDATED And PUBLISHED On August 21st, 2019
There are differences in waiting period requirements on FHA Versus Conventional Mortgage After Bankruptcy. Waiting period on FHA Versus Conventional Mortgage After Bankruptcy is shorter.
- For those who either filed Chapter 7 bankruptcy or are contemplating filing Chapter 7 bankruptcy can qualify for mortgage loans after bankruptcy
- Waiting Period Requirements during and after Chapter 13 Bankruptcy on FHA Versus Conventional Mortgage After Bankruptcy are different too
In this article, we will cover and discuss FHA Versus Conventional Mortgage After Bankruptcy.
Waiting Period On FHA Versus Conventional Mortgage After Bankruptcy & Foreclosure
Consumers can get a fresh start after bankruptcy. Home Buyers can qualify for an FHA mortgage loan after 2 years after a Chapter 7 bankruptcy has been discharged.
Federal guidelines require a mandatory 2-year waiting period for borrowers to wait after Chapter 7 Bankruptcy discharged date to qualify for FHA and VA Loans:
- USDA Home Loans requires 3 years
- Home Buyers can qualify for FHA and VA Home Loans one year into an active Chapter 13 Bankruptcy repayment plan with the approval of their Chapter 13 Bankruptcy Trustee
- There is no waiting period to qualify for FHA and VA Loans Loans after Chapter 13 Bankruptcy discharged date
- However, just passing the waiting period will not guarantee FHA mortgage loan approval
- There are other factors such as re-established credit, minimum credit scores, no late payments after bankruptcy, and debt to income ratio requirements that borrowers must meet
- There is a three year waiting period after the recorded date of foreclosure and/or deed in lieu of foreclosure to qualify for FHA Loans and USDA Loans
- There is a three-year waiting period to qualify for FHA and USDA Loans after a short sale
There is a two year waiting period after foreclosure, short sale, deed in lieu of foreclosure to qualify for VA Loans.
Waiting Period On Conventional Loans After Bankruptcy & Foreclosure
Conventional Loans have longer waiting periods after bankruptcy and foreclosure than FHA Loans.
Here are the mandatory waiting period after bankruptcy and foreclosure:
- Four year waiting period after Chapter 7 Bankruptcy discharged date
- The two-year waiting period after Chapter 13 Bankruptcy discharged date
- The seven-year waiting period after the recorded date of the foreclosure
- Four year waiting period after a short sale
- Four year waiting period after the recorded date of deed in lieu of foreclosure
Mortgage Part Of Chapter 7 On FHA Versus Conventional Mortgage After Bankruptcy
If a consumer had a mortgage and/or mortgages part of Chapter 7 Bankruptcy discharge, the waiting period after the Chapter 7 on FHA Versus Conventional Mortgage After Bankruptcy is substantially different.
- If a consumer has a mortgage part of Chapter 7 Bankruptcy discharge, there is a three-year waiting period to qualify for FHA, VA Loans, USDA Loans
- The waiting period start date starts three years from the recorded date of the foreclosure/short sale/deed in lieu of foreclosure
- The Chapter 7 Bankruptcy discharged date does not start the waiting period clock on government loans
- The actual date of the deed transfer from the homeowner’s name to the lender and/or sale date and/or sheriff’s sale is that waiting period start date
- With Conventional and VA Loans, there is a Four year waiting period from the discharged date of Chapter 7 Bankruptcy discharged date if the mortgage was part of Chapter 7 Bankruptcy discharge
- The foreclosure can be recorded at a much later date than the discharged date of the Chapter 7 Bankruptcy and it does not matter
- The foreclosure needs to be finalized and change hands from the homeowner to the lender and/or new owners
There are many instances where home buyers may qualify for Conventional Loans and NOT FHA, VA, USDA Loans when they have mortgage part of the bankruptcy and the deed is recorded at a much later date after the discharged date.
VA Loans After Bankruptcy & Foreclosure
The Department of Veteran Affairs (VA) has much more lenient waiting period requirements after bankruptcy and foreclosure.
- There is a two-year waiting period to qualify for VA Loans after Chapter 7 Bankruptcy discharged date
- There is a two-year waiting period to qualify for VA Loans after the recorded date of foreclosure and/or deed in lieu of foreclosure
- There is a two-year waiting period to qualify for VA Loans after the short sale
- VA is the only mortgage loan program that exempts deferred student loans from debt to income ratio calculations
In order for deferred student loan DTI exemption, the veteran’s student loans need to be deferred 12 or more months.
Overlays By Lenders On FHA Versus Conventional Mortgage After Bankruptcy
Most residential mortgage lenders have their own internal guidelines called overlays. Not all lenders have the same mortgage requirements. All lenders need to follow minimum mortgage guidelines but they can also set higher mortgage lending standards on top of the minimum mortgage guidelines. These higher mortgage standards are called lender overlays. Lenders can require a series of overlays on borrowers with prior Chapter 7 bankruptcy.
- Most lenders do not want to see any late payments by mortgage loan applicants after bankruptcy
- They also want to see re-established credit
- Most lenders require three credit tradelines with at least one-year payment history
- Other lenders may require that credit tradelines be seasoned for 24 months
- Many also require rental verification
- Verification of Rent is only valid by providing 12 months on time canceled checks to the landlord
- Cash rental payments with a receipt by the landlord does not count
- Verification of Rent is a strong credit requirement
- The canceled check requirement can be waived if the property owner is a property management company or renting an apartment or home from a licensed property management company
Then the canceled check requirement is waived and a letter from the licensed property management company will be honored.
Overdrafts After Bankruptcy
Lenders do not want to see any bank overdrafts in the prior 12 months.
- Bank statements with an overdraft in the past 12 months should not be turned in
- Turn in 60 days of bank printouts in lieu of bank statements if the borrower has overdrafts
- Get 2 months of bank statement print outs and have those print outs signed, stamped, and dated by the bank teller
Bank print outs do not reflect year to date overdraft fees and most mortgage loan underwriters will not question it.
Re-Establishing Credit After Bankruptcy
Consumers should start re-establishing credit as soon as possible after filing bankruptcy.
- The easiest and fastest way of re-establishing credit after bankruptcy is with 3 to 5 secured credit cards with $500 credit limits
- Secured credit cards are a powerful tool in re-establishing credit and improving credit scores
- Each secured credit should boost credit scores by 20 or more points
Many people can increase their credit scores by more than 100 points just with 3 secured credit cards after filing bankruptcy.
Credit Repair Program After Bankruptcy
Credit Disputes are not allowed during the mortgage process. Consumers can try to repair credit after filing bankruptcy on their own or by hiring a credit repair company. However, all credit disputes need to be retracted months before applying for a mortgage.
- Credit repair is the process of deleting derogatory information from credit report
- There are credit repair companies that can even remove bankruptcy from credit report
- However, the fact of the bankruptcy still remains on public records
- It may improve credit scores and credit report might look cleaner, but mortgage applicants still need to disclose the bankruptcy on a mortgage application
- Lenders cannot find out about late payments, collections, and charge offs but public records such as bankruptcy, foreclosure, short sale, judgments, tax liens will get discovered
- All lenders do a third party national public records search
Before starting a credit repair program, please consult with a mortgage loan officer.
Credit Disputes And Mortgage Process
Credit disputes are not allowed in the mortgage application and approval process.
- Mortgage loan applicants need to stop disputing derogatory items six months prior to applying for a mortgage
- Please note that mortgage application and approval process will come to an abrupt halt and file will be in suspense if the underwriter discovers unresolved disputes on credit report
- Removing active credit disputes will lower credit scores
- Pre-Approvals should not be issued by loan officers on borrowers with credit disputes
- Medical credit disputes are allowed and exempt
- Non-Medical Collections credit disputes with zero balances are exempt and does not have to be retracted
Borrowers who have disputes on collections with an aggregate total balance under $1,000, they do not have to retract those disputes.
Credit Scores Versus Credit Report
There are minimum credit score requirements to qualify for FHA and Conventional Loans.
- For example, FHA requires a minimum credit score of 580 for a 3.5% down payment home purchase loan
- Conventional Loans require 620 credit scores
- However there just because borrowers meet minimum credit score requirements does not guarantee automatic credit approval
There is a difference between good credit scores and good credit payment history.
Automated Underwriting System Findings
The Automated Underwriting System will not just pick up on the qualifying credit score:
- But will scan and analyze the overall borrower’s credit report
- Late payments in the past 12 months can potentially be disqualification of mortgage pre-approval
- One or two late payments is not a deal killer but multiple late payments can get an AUS denial
- Every consumer should be knowledgeable about credit, credit repair, and rebuilding and re-establishing credit
- Contact us at Gustan Cho Associates for free credit information on credit, re-establishing credit, and how to improve credit to qualify for home loans
Home Buyers who need to qualify for a government and/or conventional loan after bankruptcy and/or foreclosure with a direct lender with no lender overlays, please contact us at 262-716-8151 or text us for faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends, and holidays.